Licensing of a digital copy: does first sale doctrine kick in

Only a few hours ago, most people on the planet -- including many on the IP bit of it -- were none too familiar with the word "Kirtsaeng" and, even among the select few who knew it, not everyone could say, hand on heart, that they knew how to pronounce it.  Well, since the US Supreme Court kindly timed their publication of yesterday's ruling in Kirtsaeng v Wiley to coincide with IPKat team member Eleonora's blogpost here, the name, and the issue of "first sale" (a.k.a. "exhaustion of rights") have beem much aired.

In truth, this Kat observes, exhaustion of rights is not an easy subject to exhaust, as the post below by guest contributor Miri Frankel (Aegis Media Americas) shows.  Rather than looking at the consequences of first sale, as the US Supreme Court was required to do, Miri gives thought here to the other end of the spectrum of events leading to loss of control (or not) of an IP-protected product: can the licensing of a digital work be regarded as a species of first sale? This is what she writes:

"Can a Licence Be a “First Sale”?

Some things, like a cold glass of milk,
or the ability to resell digital music,
are just too hard to resist ...

It goes without saying that consumers have taken to digital downloads like… well, like cats to milk.  It also goes without saying that content creators – musicians, authors, music and book publishers, and movie studios – have not often dealt well with the transition from selling physical copies of works to digital copies.  Initially, illegal file-sharing sites filled the void while the music and movie industries tried to steer consumers away from digital in favour of CDs, DVDs and Blu-rays, and their proliferation continues today.  The MPAA and RIAA were thrashed by a losing battle against digital innovation. 

Happily, for the first time in years, music sales have increased year over year, as reported by the New York Times here.  In addition, book publishers are selling ever more e-books while tablets such as Apple’s iPads, Amazon’s Kindles, and Barnes & Noble’s Nooks continue to become staples in our handbags, briefcases and book bags.  

But what happens when a consumer no longer wants a digital product?  Once you have finished reading your e-book copy of The Hunger Games, can you give it – or sell it – to a friend?  Publishers generally say “no” because they consider digital copies to be licensed rather than sold (not to mention that they prefer your friend buy her copy from them rather than from you). 

Amazon and Apple, however, may soon turn that view upside down, as reported in this New York Times article.  Each corporation has applied for patents for online, second-hand digital product marketplaces that would allow users to exchange or sell digital songs, movies and books.  Amazon’s patent has been registered, while Apple’s has just recently been published.  The seller’s copy of a digital work would transfer to the buyer; the seller would no longer retain access to the work. 

Diagram from Amazon’s patent for a marketplace to exchange digital goods

These proposed digital flea markets have as their cornerstone the “first sale doctrine”:

"For over a century, the ability of consumers, secondhand bookstores and libraries to do whatever they wanted with a physical book has been enshrined in law. The crucial 1908 case involved a publisher that issued a novel with a warning that no one was allowed to sell it for less than $1. When Macy’s offered the book for 89 cents, the publisher sued.

That led to a landmark Supreme Court ruling limiting the copyright owner’s control to the first sale. After that, it was a free market".

Weighing in on more than just gTLDs, Scott Turow has stated that he believes “[t]he resale of e-books would send the price of new books crashing,” because “[w]ho would want to be the sucker who buys the book at full price when a week later everyone else can buy it for a penny?”  On the other hand, even with physical goods there are some consumers who are willing to buy a product at full price to have it first, and others who will typically wait for the product to go on sale at retail or to turn up at a second-hand shop.  Amazon, Apple and already-operational start-up ReDigi aim to allow consumers of digital goods to make the kind of buying and selling decisions that they are able to make with respect to physical goods.  But first, in ReDigi at least, legal battles must be won:

The degree to which media companies are against secondhand digital marketplaces can be seen in the music industry’s hard line toward ReDigi, a Massachusetts start-up that allows for the reselling of iTunes songs.

ReDigi took some pains to make its approach as friendly to the music companies as possible. For instance, any money gained from selling songs must be spent on new songs. And ReDigi says its system, like both Amazon’s and Apple’s, allows for only one copy of an electronic product to exist at any one moment.

Capitol Records nonetheless sued ReDigi for copyright infringement in a New York federal court and asked the judge to shut the service through a preliminary injunction. The judge declined. He is expected to rule on the merits of the case shortly.

Regardless of the outcome of the case between Capitol Records and ReDigi (Capitol Records, LLC v. ReDigi Inc.), with digital retail titans Amazon and Apple planning to join the fray, we can be sure that change is on the horizon when it comes to the business models of selling digital music, movies and books.

In this context, readers may wish to compare the position in the US with that of the European Union following the ruling of the Court of Justice of the European Union in UsedSoft, which took many of us by surprise.